How to Extend the Cash Flow Projection Horizon

Tom Rooney - May 14, 2020

The Association for Financial Professionals surveyed a group of global treasurers to discover how they’ve responded to the challenges of recent months, and one particular finding reflected a pattern we have noticed emerging across a variety of businesses.

The study* details the range of processes and measures treasury teams have adopted – or are planning to adopt – since the outbreak of the coronavirus brought the global economy to a sudden standstill.

As cash management during a crisis is not an exact science, and generally subject to a multitude of factors specific to the respective organization, the respondents were quite divided in how they’re approaching certain activities.

There was, however, notable consistency on the subject of cash forecasting. A total of 71% said that their businesses have not only prioritized forecasting but also extended their cash flow projection. Another 17% were intending to do likewise.

This struck a chord at CashAnalytics, and also mirrored several trends we’ve seen materializing among many of the head office treasury and finance departments who use our cash forecasting and liquidity planning software.

Visibility, Visibility, Visibility

Determining exactly how much cash will be needed to support their businesses has required treasurers to increase the level of detail in their forecasts.

And, while there has been an intense focus on the short-term, which often entails frequent cash flow re-forecasting, our clients have also expanded their cash flow projections to gain vital visibility over the medium-term.

As any treasury professional will attest, extending cash flow projections/time horizons is not just a matter of simply adding a column or section to a report or model – this is a process that requires serious thought and planning.

Here are four elements that must be considered when expanding your cash flow projection.

1. Determine the New Time Period…the What and the Why

To what period in the future are you extending the forecast? For example, some companies have shifted from a daily four-week forecast to a 13-week time horizon to gain rolling quarter-end visibility.

To cover all upcoming debt maturities over the next year, others have extended their 13-week forecast to a 12-month timeline. In many cases, we have seen cash flow projection extensions solely because executives and investors have set greater visibility as a new baseline reporting requirement.

2. The Level of Granularity Required

It is necessary to identify the level of granularity required for the extended forecast period. When engaging with our clients, we often remind them that there is a trade-off to be made between the degree of detail they are looking for and the amount of time and effort that will be required to gain it.

It is important to be practical in this instance. Do you really need to forecast all line items or just key cash flow drivers? Consider not just what is useful but what is possible, particularly in a pressurized environment.

3. Identify Additional Sources of Data & Personnel

Successfully fulfilling the projection extension will also depend on clearly establishing the new sources of data that will be required and, in turn, who else needs to be included in the process.

If, for example, the forecast is being extended from four to 13 weeks, it is almost certain that will require the medium-term business budgets and the involvement of the FP&A team, who we have noticed taking a more active role in the short-term forecasting of cash and liquidity.

4. Establish Forecasting Method for New Time Projection

Establish what new methods of forecasting, such as trend or regression analysis, need to be adopted to gain extended visibility. Along with identifying new data sources, this is a key practical consideration. The same methods of short-term forecasting will not extend to longer periods, and therefore, replicating them is not an option.

A Permanent Priority

This increased prioritization of cash flow forecasting is likely to be permanent and will require some businesses to implement a new, more robust process. By using this time to automate the activity, companies can ensure that their future forecasts are produced with enhanced speed, ease, and accuracy.

*Association for Financial Professionals 

CashAnalytics is a cash flow forecasting software that allows medium to large-cap companies to quickly capture and consolidate the data they require for meaningful cash management and reporting.